Mumbai: A barrage of sometimes conflicting statements from government officials over economic policy has fuelled concerns that excessive chatter causes unnecessary market volatility in India and undermines central bank independence.
The frequent talk is magnified by the rise of India’s fiercely competitive 24-hour business TV channels, hungry for sound bites from often elderly politicians and long-time civil servants who occasionally seem oblivious to market impact.
At the heart of the matter may be the growing pains of an emerging giant of 1.2 billion people. In two decades, India has transformed itself from a state-dominated economy to an increasingly open market, with all the risks that entails. Now as a rival to China, India’s every move is in the spotlight as its growth helps drive a world recovery.
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But a tendency to over-promise, from targets for building roads and power plants to keeping fiscal deficits in check, can erode the credibility of predictions.
“Everyone talking at the drop of a hat creates unnecessary volatility in the market,” said Nirav Dalal, head of debt capital markets at Mumbai-based Yes Bank.
This year, Union agriculture minister Sharad Pawar was criticized by both the ruling Congress party and the opposition for pushing up local sugar prices after he said that India may need large imports.
While India is not alone when it comes to assorted officials weighing in on monetary, fiscal and economic matters, the frequency of statements from high-level sources sets it apart.
“Relative to other east Asian economies, there is a lot more seemingly credible commentary and analysis, some of which may be contradictory,” said UBS economist Philip Wyatt.
“I think that reflects India’s size, India’s need to upgrade its institutions in line with markets, but at the same time the ability of senior officials in different arms of government to have a mouthpiece,” said Wyatt, who is based in Hong Kong.
Turf, Independence, Transparency
Government commentary on monetary policy appears to challenge the central bank’s independence.
While the government is eager to maintain pro-growth policies, the Reserve Bank of India (RBI) chief Duvvuri Subbarao is worried about inflation and a nagging fiscal deficit.
“I believe the government thinks that the RBI has an important role to play, but that ultimately it’s there mainly to support government pro-growth policies,” said Wyatt.
Before the RBI’s last policy review, the prime minister’s economic advisor C Rangarajan called for rates to remain unchanged but said a cut in liquidity might help trim inflation expectations. Bond yields fell 2 basis points after his comments.
The central bank ultimately left rates unchanged but raised the cash reserve ratio for banks more than was expected.
“While the government is obviously, presumably, welcome to air its own views, it should air those views, I think, more in private than in public,” said Robert Prior-Wandesforde, senior Asian economist at HSBC in Singapore.
“I would suggest, because inevitably it gives the impression, whether rightly or wrongly, that the RBI is not independent.” Besides Rangarajan, finance minister Pranab Mukherjee and Subbarao himself carry plenty of weight.
Subir Gokarn, who is the newest RBI deputy governor, joined the bank from the private sector and is seen attuned to markets.
His statements that the RBI would adjust policy outside of quarterly meetings only in extraordinary circumstances sent a signal the central bank was looking to be more transparent.
Open Mouth Operations
A mushrooming of financial news services and TV networks -- India has four English-language business channels -- forces officials to negotiate the volatility of real-time media.
Last July, Suresh Tendulkar, then-chairman of the prime minister’s economic advisory council, told reporters in France that the weight of the dollar in the basket of currencies that helps set the rate of India’s rupee may be reduced.
Although he acknowledged that he was not directly involved in such policy, his remarks made headlines after China had sought debate on a new reserve currency. He left his post soon after.
Almost daily forecasts for data such as GDP growth may erode their value. On Monday, for example, the official forecast for growth in this fiscal year was released as 7.2%. Then two day later Mukherjee jumped in with a 7.75% estimate.
Many predictions often prove rosy in hindsight.
“Unlike other Asian economies where actual outcomes are generally better than policymakers’ guidance, in India’s case, the outcomes rarely do better than guidance,” Rajeev Malik, economist at Macquarie in Singapore, wrote in a recent note.